Burger King 2009 Annual Report Download - page 82

Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
Inventories
Inventories are stated at the lower of cost (first−in, first−out) or net realizable value, and consist primarily of restaurant food items
and paper supplies. Inventories are included in prepaids and other current assets in the accompanying consolidated balance sheets.
Property and Equipment, net
Property and equipment, net, owned by the Company are recorded at historical cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight−line method based on the estimated useful lives of the
assets. Leasehold improvements to properties where the Company is the lessee are amortized over the lesser of the remaining term of
the lease or the estimated useful life of the improvement.
Leases
The Company defines lease term as the initial term of the lease, plus any renewals covered by bargain renewal options or that are
reasonably assured of exercise because non−renewal would create an economic penalty. Once determined, lease term is used
consistently by the Company for lease classification, rent expense recognition, amortization of leasehold improvements and minimum
rent commitment purposes.
Assets acquired by the Company as lessee under capital leases are stated at the lower of the present value of future minimum lease
payments or fair market value at the date of inception of the lease. Capital lease assets are depreciated using the straight−line method
over the shorter of the useful life of the asset or the underlying lease term.
The Company also enters into capital leases as lessor. Capital leases meeting the criteria of direct financing leases are recorded on
a net basis, consisting of the gross investment and residual value in the lease less the unearned income. Unearned income is recognized
over the lease term yielding a constant periodic rate of return on the net investment in the lease. Direct financing leases are reviewed for
impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable based on the
payment history under the lease.
The Company records rent expense and income for operating leases that contain rent holidays or scheduled rent increases on a
straight−line basis over the lease term. Contingent rentals are generally based on sales levels in excess of stipulated amounts, and thus
are not considered minimum lease payments.
Favorable and unfavorable operating leases were recorded in 2002 as part of the acquisition of BKC by private equity funds
controlled by TPG Capital, Bain Capital Partners and the Goldman Sachs Funds (“the Sponsors”) and subsequent acquisitions of
franchise restaurants. The Company amortizes these favorable and unfavorable leases on a straight−line basis over the remaining term
of the leases. Upon early termination of a lease, the write−off of the favorable or unfavorable lease carrying value associated with the
lease is recognized as a loss or gain in the consolidated statements of income.
Goodwill and Intangible Assets Not Subject to Amortization
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in the
Company’s acquisitions of franchise restaurants, which are accounted for as business combinations. The Company’s indefinite−lived
intangible asset consists of the Burger King brand (the “Brand”), which was recorded as part of the acquisitions of BKC by the
Sponsors.
Goodwill and the Brand are not amortized, but are tested for impairment on an annual basis and more often if an event occurs or
circumstances change that indicates impairment might exist. The impairment test for goodwill requires the Company to compare the
carrying value of a reporting unit (with assigned goodwill) to its fair value. The Company’s reporting units are its operating segments,
as defined under FASB Statement of Financial Accounting Standards (“SFAS”) No. 131 “Disclosures About Segments of an Enterprise
and Related Information.” If the carrying value of the reporting unit exceeds its estimated fair value, the Company may be required to
record an impairment charge to goodwill.
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